~ Thoughts about real estate from the group in Guelph

The growing importance of Real Estate

Sept. 1 was a big day for investors: the number of industries to be considered increased from 10 sectors to 11. [1][press release from GICS]

Real estate businesses used to be included in the Finance Sector, even if the fit was not quite right. Mostly, this change affects REITs, although the new sector also includes companies which provide various kinds of services to the real estate industry (such as property management, appraisal and brokerage).

There are important differences between real estate business and the businesses which remain in the finance sector and real estate, such as banks, stock brokerages, and insurance companies. Some of those differences include the fact that decision makers in real estate need to be aware of assets being illiquid, of holding periods measured in a decade or two, of operational considerations affecting valuation, and of differences in the sensitivity to interest rates or inflation. A big difference between real estate markets and the markets for other businesses involved in financial activities is the amount and quality of information.

Now that real estate is considered on its own, investment analysts can stop comparing apples with oranges, which will increase transparency for investors. Metrics which might seem reasonable when judging the value of a stock or bond are not necessarily reasonable in this sector. It is causing changes to ETFs. Some research suggests that categorization can have spillover effects to companies that are “sort of” related.

This change will accelerate the maturing of the industry. Everybody agrees that real estate is big (measured in many trillions of US dollars worldwide) even if ownership is not always formal or even recognized by a government. In Canada, the trend for pension funds and others to invest in real estate can be expected to continue. They see investments in various forms of real estate as profitable but they also need to answer the questions of shareholders.

This change recognizes something that we have been following for some time. As we tell our students frequently, the trend means that the industry is becoming more mature and the expectations for a “good” employee are changing. Employers want to hire people who act professionally, even if doing so is less colourful than was true of the previous generation of real estate managers.